Etherfuse Stablebonds as an essential blockchain primitive, feat Dave Taylor, CEO of Etherfuse

The Genesis of Etherfuse

Etherfuse, a pioneering company in the blockchain space, has been working tirelessly for the past three years to bring real-world assets (RWAs) on-chain through tokenized government bonds called "stablebonds." The company's journey began with a vision to fix the bloated payments industry by leveraging the speed and low cost of the Solana blockchain.

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Dave Taylor, CEO of Etherfuse, shared the company's origin story on the Solfate Podcast. With a background in computer science, cryptography, and network security from companies like Boeing and Apple, Taylor saw an opportunity to revolutionize the financial sector using blockchain technology.

"When we started to hear about Solana and the speeds and the cost, it was like, this is the future," Taylor explained. "We just knew it. And it was like our Jeff Bezos moment where it's like, look at the growth in this space. Let's build something there."

Navigating Regulatory Challenges

One of the biggest hurdles Etherfuse faced was navigating the complex regulatory landscape surrounding securities on the blockchain. The team initially looked at the United States but quickly realized that issuing securities on-chain would not be feasible there in the near term.

This led them to explore other countries with the most incentives to enable on-chain securities issuance. After considering factors such as the cost of credit, remittance volumes, and lack of financial access, Etherfuse settled on Mexico as their launching point.

"We literally just went to Mexico and looked for a lawyer and looked for a way to interface with the SEC there," Taylor recounted. "We started three years ago, we petitioned the SEC to give us guidance on how to issue securities on chain."

A Groundbreaking Regulatory Approach

After a year of back-and-forth with Mexican regulators, Etherfuse received an unexpected response. The Mexican SEC determined that their proposed tokens were not securities, which initially seemed like a setback. However, this ruling ultimately provided Etherfuse with a unique opportunity.

"We got fundamentally what's a no-action letter from them describing why they don't believe our protocol constitutes a security and how we can operate legally and be regulated," Taylor explained. This regulatory clarity allowed Etherfuse to tokenize and issue any asset they wanted in Mexico and offer those to the blockchain ecosystem.

Stablebonds: A New Primitive for Foreign Exchange

With the regulatory hurdles cleared, Etherfuse set its sights on creating a new primitive for the largest market in the world: foreign exchange. The company has launched its first five stablebonds, representing tokenized government treasuries from the United States, Mexico, Great Britain, Brazil, and Europe.

These stablebonds serve as the foundation for a more efficient and accessible foreign exchange system on the blockchain. Taylor emphasized the importance of this development: "It's a moral imperative to bring FX on chain."

The Technical Implementation on Solana

Etherfuse's technical implementation on Solana involves a smart contract that keeps track of every asset issued and the rate at which it compounds versus the underlying assets. The team updates these rates weekly based on yield information from central banks.

Initially, Etherfuse used Solana's token extensions to manage yield and present it to users. However, Taylor admitted that this decision posed challenges: "The worst decision as a company we ever made was using token extensions."

Despite these difficulties, Etherfuse has created a sophisticated system that allows for continuous compounding of yields on-chain, with weekly updates to align with real-world asset performance.

Stablebonds as a Primitive for Stablecoins

One of the key applications of stablebonds is as a primitive for stablecoins. Taylor explained how this works: "When I look at a stablecoin, just high level, it's got two primitives. So I give, and we'll use Circle, I give Circle dollars. They take 75 cents and put in treasuries and they keep the other quarter to manage volumes daily."

Stablebonds simplify this process by handling the complex part of managing collateral and assets. When someone buys a stablebond from Etherfuse, the company converts the payment to the fiat currency of the target country, buys the corresponding asset, and provides all the necessary regulatory and compliance work for free.

This simplification opens up possibilities for smaller teams to launch regulated stablecoins in various currencies. Taylor gave an example: "We went to the US and we talked with Braille. Braille, you're a stablecoin issuer. I want you to know that you can now issue Mexican pesos regulated in the US as a US stablecoin, which without us is impossible."

Revolutionizing Foreign Exchange

The true power of stablebonds lies in their potential to revolutionize foreign exchange. Traditional FX systems are bloated with costly fees that aren't always justified. Etherfuse aims to drastically reduce these costs by leveraging the efficiency of decentralized finance (DeFi) on Solana.

Taylor illustrated this point with a compelling example: "If you look at the pathway of the US to Mexico, it's one of the most sophisticated remittance pathways in the world, meaning it should be the most highly optimized. But if you're just like a person, sending money to Mexico, it can cost you up to 700 bips."

He then contrasted this with the potential of stablebonds and DeFi: "If you use stable coins, you can go down to 100 bips for FX and off-ramping. If you use us, on and off-ramping is free. And so now we only have to worry about FX."

The Efficiency of DeFi for Foreign Exchange

Taylor argued that DeFi provides a superior marketplace for foreign exchange compared to traditional systems. In conventional FX, larger players often get better rates due to their volume, which inversely affects smaller users who end up paying higher fees.

DeFi, on the other hand, offers a more equitable system. "The way DeFi works is the smaller your trade size, the less you affect the supply curve. So it's cheaper for you," Taylor explained. This characteristic of DeFi aligns well with the needs of most users, who typically make smaller transactions.

Moreover, stablebonds eliminate the need for "dead money" in the system. Traditional FX requires holding large amounts of different currencies, which don't earn yield and increase costs. Stablebonds, being interest-bearing assets, remove this inefficiency.

The Global Potential of Stablebonds

Etherfuse's stablebonds are currently available for five major markets: Mexico, Brazil, Europe, Great Britain, and the United States. However, the company has ambitious plans to expand globally within the next 18 months.

This expansion could have far-reaching implications for the global financial system. By bringing foreign exchange on-chain, Etherfuse aims to make money movement across the world cheaper and more accessible.

Yield Opportunities with Stablebonds

One of the attractive features of stablebonds is the yield they offer. Government bonds from countries outside the United States often provide higher yields to compensate for currency risk. For example, Taylor mentioned that Mexican Cetes (treasury certificates) were yielding around 9% at the time of the podcast.

These yields, combined with potential currency appreciation, can lead to significant returns. "So I think Cetes is probably hitting like 18 to 20% right now," Taylor estimated, factoring in the strong performance of the Mexican peso against the US dollar.

The Future of Etherfuse and Stablebonds

Looking ahead, Etherfuse is focused on integrating with key players in the DeFi ecosystem. Taylor mentioned ongoing work with platforms like Orca, Kamino, and Jupiter, hinting at exciting developments to come.

The company is also seeing increased activity on other blockchain networks, including Aerodrome on Base and lending activities on Stellar. However, Taylor expressed hope for growing adoption on Solana in the near future.

Conclusion: A New Era for Foreign Exchange

Etherfuse's stablebonds represent a significant leap forward in bringing real-world assets on-chain and creating more efficient financial systems. By simplifying the process of issuing regulated stablecoins and providing a new primitive for foreign exchange, Etherfuse is paving the way for a more accessible and cost-effective global financial ecosystem.

As the company continues to expand its offerings and integrate with more DeFi platforms, we can expect to see increasing adoption of stablebonds and potentially a transformation of how we think about and execute foreign exchange transactions. The moral imperative of bringing FX on-chain, as Taylor puts it, could lead to a more equitable and efficient global financial system, powered by the speed and low cost of the Solana blockchain.

Facts + Figures

• Etherfuse has been working for three years to bring real-world assets on-chain through tokenized government bonds called "stablebonds."
• The company chose Mexico as its launching point after considering factors such as the cost of credit, remittance volumes, and lack of financial access.
• Etherfuse received a no-action letter from Mexican regulators, allowing them to tokenize and issue assets legally.
• The company has launched stablebonds for five major markets: the United States, Mexico, Great Britain, Brazil, and Europe.
• Traditional remittance pathways between the US and Mexico can cost up to 700 basis points for individual senders.
• Using stable coins can reduce FX and off-ramping costs to 100 basis points, while Etherfuse's solution offers free on and off-ramping.
• Mexican Cetes (treasury certificates) were yielding around 9% at the time of the podcast, with potential total returns of 18-20% when factoring in currency appreciation.
• Etherfuse aims to expand its stablebond offerings globally within the next 18 months.
• The company is seeing increased activity on other blockchain networks, including Aerodrome on Base and lending activities on Stellar.
• Etherfuse's MXNE (Mexican peso stablecoin) has outcompeted other solutions by 200,000 times in daily volume.

Questions Answered

What are stablebonds?

Stablebonds are tokenized government bonds that Etherfuse has created as a new primitive for foreign exchange on the blockchain. These digital assets represent real-world government treasuries from various countries, including the United States, Mexico, Great Britain, Brazil, and Europe. Stablebonds serve as interest-bearing collateral that can be used to issue stablecoins or facilitate more efficient foreign exchange transactions on decentralized finance platforms.

How do stablebonds make foreign exchange more efficient?

Stablebonds improve foreign exchange efficiency by leveraging the decentralized finance (DeFi) ecosystem on Solana. Unlike traditional FX systems that require holding large amounts of "dead money" in different currencies, stablebonds are interest-bearing assets that eliminate this inefficiency. They also benefit from DeFi's characteristic of offering better rates for smaller transactions, which aligns with the needs of most users. This results in lower fees and more accessible foreign exchange services for individuals and businesses alike.

What regulatory challenges did Etherfuse face in creating stablebonds?

Etherfuse faced significant regulatory hurdles in bringing stablebonds to market. Initially, they explored options in the United States but found it unfeasible to issue securities on-chain there. They then turned to Mexico, where they spent a year in discussions with the Mexican SEC. Surprisingly, Mexican regulators determined that Etherfuse's tokens were not securities, which led to a no-action letter allowing the company to operate legally and issue tokenized assets in Mexico.

How can stablebonds be used to create stablecoins?

Stablebonds serve as a primitive for creating stablecoins by providing the regulated, interest-bearing collateral needed to back a digital currency. When someone buys a stablebond from Etherfuse, the company converts the payment to the target country's fiat currency, buys the corresponding government bond, and handles all regulatory and compliance work. This simplifies the process for teams wanting to issue regulated stablecoins in various currencies, as they can use stablebonds as collateral without having to manage the complex backend operations themselves.

What yields do stablebonds offer?

Stablebonds offer yields based on the underlying government bonds they represent. These yields can be attractive, especially for bonds from countries outside the United States, which often provide higher rates to compensate for currency risk. For example, at the time of the podcast, Mexican Cetes (treasury certificates) were yielding around 9%. When combined with potential currency appreciation, total returns could reach 18-20%, making stablebonds an interesting investment opportunity in addition to their utility in foreign exchange.

How does Etherfuse plan to expand its stablebond offerings?

Etherfuse currently offers stablebonds for five major markets: the United States, Mexico, Great Britain, Brazil, and Europe. The company has ambitious plans to expand its offerings globally within the next 18 months. This expansion aims to bring more real-world assets on-chain and further improve the efficiency and accessibility of foreign exchange across a wider range of currencies and markets.

What advantages does DeFi offer for foreign exchange compared to traditional systems?

DeFi offers several advantages for foreign exchange compared to traditional systems. First, it provides better rates for smaller transactions, which benefits the majority of users who typically make smaller transfers. Second, DeFi eliminates the need for "dead money" in the system, as stablebonds are interest-bearing assets. Third, the global, 24/7 nature of DeFi platforms allows for more efficient and accessible foreign exchange services. Lastly, the transparency and programmability of blockchain technology enable more innovative and cost-effective solutions for currency exchange and remittances.